Do it yourself

After the recent geopolitical escalation between India and Pakistan, the president of the United States (POTUS), Donald J. Trump, has become one of the most hated personalities amongst Indian households. His babbling about facilitating a truce between two neighbors, offering trade deals as incentive, may not have gone well with most Indians; even though the Indian government has officially denied any role of the POTUS and his administration in negotiation with Pakistan. This is perhaps one of the reasons the market discourse has mostly ignored “the strategic economic partnership” signed between U.S. President Donald Trump and Saudi Arabia’s Crown Prince Mohammed bin Salman, last week.

In my view, this renewed strength in the Arab-US relations is very significant, not only for the US economy, but also for a much wider global economic context. Although, it might be speculative on my part, nonetheless I believe that this “strategic economic partnership” deal could potentially result in—

(a)   a material reduction in global geopolitical conflicts and yielding some peace dividend to the global economy;

(b)   strengthening of the USD, reinforcing its position as the primary global reserve currency;

(c)   additional demand for the US treasuries, arresting the yields;

(d)   sustainable reduction in energy inflation, affording good reasons to the US Fed for embarking on a sustained easing path;

(e)   normalization of global trade, especially aiding the growth in export-oriented economies like China;

The US-Arab strategic economic partnership

Last week, the U.S. and Saudi Arabia signed a strategic economic partnership that includes a range of deals. The agreement aims at boosting bilateral economic ties. The white house claimed that the deal entails a total investment commitment of $600 billion by Saudi Arabia into the US, encompassing investments in defense, energy, technology, arts, and zoology. Notably, some sources have claimed that the actual new commitments may be closer to $283 billion, since the US$600bn number includes some projects predating the latest agreement.

The deal reflects Saudi Arabia’s interest in diversifying its economy and the U.S. goal of securing foreign investment. A significant part of the agreement is a $142 billion arms deal, including sales of military equipment to Saudi Arabia, strengthening its defense capabilities and U.S.-Saudi security ties.

The stated part of the deal is significant. However, various sources are alluding to the unstated part, which could be transformative. For example,

(i)    The BoFA Securities strategist believes that this deal implies that the US is abandoning the original plan to boost its oil production to 3mbpd (from the current 1.7mbpd), as it is influencing OPEC+ “to boost oil output in return for lifting Russia sanctions, military support for OPEC nations (Iran deal a further catalyst)”.

(ii)   As per Reuters, Trump has relaxed requirements for Saudi Arabia to normalize relations with Israel as a condition for U.S. support in developing a peaceful nuclear program, signaling a shift in U.S. foreign policy priorities. This could pressurize Israel to stop hostilities against Palestine, ending one of the most brutal conflicts in recent years and paving the way for reconstruction of Gaza and other Palestinian territories.

(iii)  Lifting economic and other sanctions on Syria simultaneously with signing this deal, corroborates this shift. Given Trump’s focus on n U.S. economic and strategic interests, it could be reasonably speculated that lifting of Russian sanctions is on the table, as it aligns with these goals, especially securing energy supply chains for the European Union, and preventing the UE, Russia and Arabs from becoming too close to China. Resumption of US-Russia trade could also open new possibilities of a durable ceasefire between Russia and Ukraine.

(iv)  Saudi Arabia agreeing to retail petrodollar (pricing its crude in USD terms) implies a consistent demand for the USD, and flows into the US treasuries. This could halt the process of de-dollarization, if not completely reverse it.

To sum up, the latest US-Arab deal removes much uncertainty and adds some hope of a peace dividend accruing to the global economy in the next couple of years. Trump promoting “Trade” over “War” is definitely a good sign for the financial markets in particular.

India is reportedly at an advanced stage of trade negotiation with the Trump administration. Hopefully, this deal would be a balanced one and shall remove the uncertainty hanging over the markets for a couple of months.

 South Block’s Doctrine, North Block’s Dilemma

Micro, small and medium size enterprises (MSME) have been widely recognized as the core of India’s development plan. MSME are not only critical from their economic importance, but are also drivers of social development. MSMEs generate large employment; help in managing regional imbalances; help in bridging income and wealth inequalities; and most importantly, enable the large enterprises to attain competitive scale and efficiency. MSMEs contribute 30.1% to India’s Gross Value Added and 45.79% to exports (₹12.39 lakh crore in 2024-25).

A few years ago, I had to make a visit to a local garbage dump site in Delhi. My wife had lost an earring, which she thought could have been dumped there with the daily kitchen waste. The visit was a revelation for me as it introduced me to a significant phenomenon of our society.

The weather has changed suddenly. What was dark and grim on Friday evening, became bright and pleasant on Monday morning.

In the early hours of Wednesday, the 07^th May 2025, Indian forces, led by the Indian air force (IAF) carried out precision strikes on nine targets in the Pakistan Occupied Jammu and Kashmir and Punjab province of Pakistan.

As per the Indian authorities, the targets were terrorist camps. The strikes have been purportedly carried out in response to the killing of 25 Indian and one Nepali tourist in the Pahalgam area of Kashmir, last month. The Indian government sources confirmed that (i) the strikes were carried out from the Indian airspace and international border was not violated; and (ii) no civilian or military installations were hit during the strikes.

Preceding the yesterday’s strikes, the Indian government had taken a series of economic and diplomatic measures against Pakistan for failing to prevent terrorism activities against India from its land, and providing active support to the terrorism ecosystem thriving on its land.

Pakistan also retaliated with some economic and diplomatic measures against India. Consequently, the trade between the two countries (valued at US$1.2bn in FY24) has completely stopped and all direct diplomatic channels of discussion are officially closed. Both countries have prohibited the use of airspace and port facilities to the civil and commercial carriers of each other.

The government of India has suspended compliance of the 1960 Indus Water Treaty (IWT). IWT is a water-distribution treaty between India and Pakistan, arranged and negotiated by the World Bank, to use the water available in the Indus River and its tributaries.

The government of Pakistan announced suspension of the compliance with the 1972 Shimla Agreement. The agreement has governed the diplomatic relations and all interactions relating to the matters of mutual interest and conflicts between the two countries, in the past five decades.

There have been reports of violation of ceasefire and persistent light arm firing across the line of control in Jammu and Kashmir from both the sides in the past ten days. After yesterday's strikes, the shelling has reportedly increased and heavy artillery is being used. There are some unconfirmed reports of civilian casualties due to the shelling.

Under these circumstances, investors in India, may like to ask the following questions and find answers to these:

·         Could the present conflict escalate into a full-fledged war between the two nuclear powers?

·         If the conflict does escalate to a full-fledged war, how long this war may continue, and what would be the implications for the Indian economy, and therefore markets?

·         Could a full scale war (first after 1971) with Pakistan have any adverse international diplomatic or economic implications for India?

·         How prepared investors and markets for a full-scale war?

This morning, it is very difficult to make an assessment of the likely intensity and duration of the present conflict between two neighbors who have been at loggerheads for the past 78 years. Nonetheless, prima facie it appears that the markets are complacent and unprepared for any further escalation. I shall share my views on the above inquisition next week.

Recently the Ministry of Statistics and Program Implementation, Government of India, released the results of the Forward-Looking Survey on Private Sector CAPEX Investment Intentions, providing valuable insights into 3 year trends and future outlook private corporate sector capital expenditure plans.

The good

·        The average Gross Fixed Assets (GFA) per enterprise in the private corporate sector increased from Rs. 3,151.9 crore in 2021–22 to Rs. 4,183.3 crore in 2023–24, reflecting a healthy growth of 32.7% over the two years. This implies an average capital expenditure of Rs 366cr per corporate during FY22 to FY24. The estimated provisional capital expenditure per enterprise for purchasing new assets in the year 2024–25 is Rs. 172.2 crore.

·         Overall aggregate capital expenditure of the private corporate sector increased 66.3% over the four-year period from 2021-22 to 2024-25.

The bad

·         Out of the total capital expenditure provisionally incurred in the year 2024-25, only 53.1% were utilized for purchasing machinery & equipment.

·         The strategy of investing in distressed assets and non-performing loans was adopted by less than 0.5% of enterprises. 

·         Only about half of the capex in FY25 is for capacity addition. Over 30% capex is for maintenance, upgrade etc.

The ugly

·         Intended capex for FY26 is about 25% lower as compared to FY25.

·         Capex in the manufacturing sector is ~44% of the total capex committed in FY25. Services (telecom, IT Services, transportation, storage etc.) account for the rest 56% of the capex. Consequently, the employment intensity of the capex remains poor.

As highlighted in the latest Annual Survey of Industries, total employment in the manufacturing sector grew just at a CAGR of 3.2% during the five-year period from FY19-FY23 (see here). Lower capex and even lower manufacturing capex does not augur well for the growth of employment opportunities.

Last week, two important events took place in New Delhi. First, the union cabinet decided to include collection of caste data in the periodic general census; and second, the Supreme Court annulled the acquisition of Bhushan Steel and Power Limited by JSW Steel Limited four years ago, following the proper Insolvency and Bankruptcy Code procedures.

Notwithstanding the argument that inclusion of caste data in the census could be promote social equity, and the JSW-Bhushan annulment might reflect judicial efforts to uphold legal integrity, I find these two events significant for investors and businesses, as these further strengthen the perceptions of unpredictability and instability in the sphere of policy making and political process.

In the recent past we have seen executive actions adding considerable unpredictability in the economic process. Demonetization of high value currency notes (2016); abandoning of Amaravati capital project and cancellation of all partially executed and unexecuted orders by YSR Congress government (2019); repeal of three farm laws (2021); policy on GM seeds; taxation of foreign investors; Several flip flops in telecom policy, railway procurement (e.g., 2017 GE locomotive deal), solar power, pension rules, etc. are only a few examples. Arguably, political parties lack strong commitment to any socio-economic ideology and are often susceptible to compromise on their electoral promise, making the task of business decision making based on election manifestos redundant.

The decision to include caste related data in the decennial national census, is just another case of issues strongly opposed (or supported) by the government and later reversed primarily due to political expediency. This decision adds material uncertainty to the state and corporate (fear of reservation in private jobs) recruitment policies and admission process of the institutes of higher learning.

Despite several promises, the government remains the biggest litigant in the country. As per various estimates, the government (Central, State, and public sector undertakings) is a party to more than 45% of pending court cases in India, and responsible for more than 70% of cases admitted by the Supreme Court.

It is commonly observed that bureaucrats and regulators indulgently pursue litigation, allegedly to avoid accountability, and sometimes even due to personal egoistic urge, using taxpayer money without scrutiny. Various estimates suggest that the government’s success rate in cases/appeals filed by it, is abysmally low. The Income Tax Department reportedly loses 65–85% of its cases in higher courts. The conviction rate in cases filed by the enforcement agencies and regulators like ED, CBI, SEBI, etc., is also low. For example, the Enforcement Directorate (ED) registered 5,297 money laundering cases in the past 10 years across the country, but trials have been completed in only 43 cases so far, according to a report by the central agency submitted to Parliament.

State authorities, police department and lower judiciary audaciously ignore the guidelines set by the Supreme Court in the matters of investigation, arrests, bail, punishment outside judicial process (e.g., demolishing residences of the accused), etc.; instilling a sense of fear amongst common people and making them extremely vulnerable to the exploitation by corrupt officers and judges and frustrating the due process of law.

This clearly highlights the extent of governance deficit, lack of coordination & mutual trust between various organs of the government, fault lines in the federal structure, bureaucratic inefficiencies, deep rooted corruption, widely prevalent malpractices.

It is evident from the JSW-Bhushan Steel episode that various organs of the government lack coordination and cohesiveness in policy making, even in the issues having much wider economic repercussions. Long term socio-economic interests of the country are often ignored for immediate political expediency or pecuniary gains.

A question usually asked by investors and other people is “why India has consistently failed in generating sufficient escape velocity to move to higher economic growth orbit, like some of its global peers like China, have achieved, in the past three decades?”

There are a multitude of reasons for our inadequate growth, including our inability to implement structural reforms to eliminate corruption and promote efficiency. In particular, we have failed in making our economic policies predictable & stable and sustainable – one of the prerequisites for achieving faster growth. Failure to control the tendency of the executive to overreach and overregulate, which perhaps has roots in our colonial and feudal past, may also be responsible for our slower growth and development.

If we want to move to higher growth orbit and realize our aspirational goals of a developed nation by 2047, we need to first ensure stability and predictability of policy, and make a commitment to the slogan of “less government more governess” through appropriate legislative process. Prescribing strict rules for appeals by the government against the decisions of the government authorities and lower courts, would also be a strong signal.

Continuing from yesterday…(see here)

As I mentioned that the old narratives of the Smoot-Hawley Tariff Act (Tariff protection for domestic businesses), New Deal (Fiscal profligacy to stimulate economy) and Plaza Accord (fiscal and monetary manipulation by government/central banks to balance trade) do not fit the current circumstances, given the vastly different context. The efforts to fit the current U.S. President’s economic actions (and promises) related to trade, tariffs, and fiscal policy into historical molds, don’t align with today’s reality, and may be an exercise in futility.

For example, consider the following:

·         In 1930, global trade was 5% of U.S. GDP, and the world economy was already in freefall post-1929 crash. In 2025, trade is a larger share of GDP (e.g., ~25% for the U.S.), but global supply chains are far more integrated, making outright trade wars costlier and less likely. Modern trade agreements (e.g., USMCA, WTO) and digital economies add complexities that were not present in 1930.

Smoot-Hawley’s tariffs were sweeping and indiscriminate (40–60% increase across the board). Current U.S. tariff proposals (e.g., 10–30% on imports, higher on China) are targeted; negotiable; and used more as leverage rather than permanent barriers. Retaliation risks exist (e.g., EU or China tariffs), but multilateral frameworks mitigate escalation.

The 1930s lacked modern central bank tools like QE or quicker rate adjustments. In 2025, central banks globally can counteract trade shocks swiftly; unlike the gold-standard-constrained 1930s.

Critics overstate Smoot-Hawley’s relevance, projecting a worst-case scenario without acknowledging 2025’s resilience (e.g., diversified U.S. economy and tech dominance). The analogy ignores that tariffs today are often diplomatic tools, not ideological commitments, unlike Smoot-Hawley’s protectionist zeal.

·         The New Deal addressed 25% unemployment and a collapsed banking system. In 2025, U.S. unemployment is low (4–5%), and banks are stable, though inflation and debt ($36T) pose challenges. The urgency for New Deal-scale intervention is absent.

The New Deal was a comprehensive overhaul of the extant system. Adherence to Keynesian theory was at core of the New Deal. Trump’s infrastructure spending may echo WPA projects, but without the New Deal’s social safety net expansion or unified vision. Besides, current policies are often stalled by partisan gridlock or judicial review, unlike Roosevelt’s legislative dominance.

The New Deal’s trade liberalization (1934 Act) countered Smoot-Hawley’s damage. In 2025, trade policy is biased towards protectionism, not liberalization; and global allies are skeptical of the US leadership, unlike the 1930s’ pre-WWII alignment.

·         In 1985, the G5 shared aligned interests (Cold War unity, Japan’s deference). In 2025, the Sino-US rivalry, EU autonomy, and BRICS expansion (e.g., India’s growing role) complicate cooperation. A coordinated currency intervention (like in Plaza Accord) is unlikely given China’s managed yuan and the US political volatility.

The Plaza Accord used currency markets, not tariffs or fiscal policy. Current US actions emphasize more on tariffs and sanctions, not multilateral agreements, reflecting unilateralism over 1985’s teamwork.

The Accord strengthened the US’s exports but sparked Japan’s asset bubble and a lost decade. In 2025, similar interventions risk unintended consequences (e.g., inflation from a weaker dollar), but global economic fragmentation reduces the Accord’s replicability.

G-5 has now been replaced with G-20, which is not necessarily aligned with the US on trade or geopolitical issues.

·         Unlike 1930 or 1985, today digital economies (e.g., AI, e-commerce) and global supply chains dominate trade. A 1930 like trade war would disrupt tech flows (e.g., semiconductors), not just goods, with broader fallout. Similarly, a New Deal’s public works may be much less transformative today when remote work and AI are reshaping labor markets.

·         Current US political polarization and debt levels materially constrain a New Deal-scale ambition, while cultural shifts (e.g., distrust in institutions) differ from 1930s’ unity or 1985’s optimism.

In my view, rather than forcing old frameworks in the current crisis, it would be more useful if the US policymakers craft a “new solution” suitable to 2025 conditions. The new solution may, for example, include:

·         Fair taxes on trade: Tax goods from some countries but let allies like India sell clothes or spices without extra costs. This keeps prices low for Indian shops and helps American workers.

·         Green projects: Build solar panels, electric car batteries and chargers, like new roads in the 1930s, to create jobs and fight climate change.

·         Global teamwork: Create a new group with India, China, and others to agree on development of a neutral digital currency for international trade settlements; framework for global digital payments, like a global UPI, as an alternative to SWIFT, so no one country controls everything. These ideas can help the US to grow together with its trade partners, without repeating past mistakes.

These are just a few of the suggestions. A pragmatic approach, rather than adopting whimsical and jingoistic measures to achieve MAGA goals, will lead all down, including the US.

Also read

Straitjacketing a crisis-1

Do you recall Jack Braganza from the popular Hindi movie Bobby (1973)? The affable patriarch wore his marriage suit while visiting the house of Raj, his daughter Bobby’s lover, to discuss their marriage proposal. The suit would not fit him after so many years, but that was perhaps all he had in the name of formal attire.

In the movie, this scene created a comic sense. However, in real life it is not uncommon in millions of lower middle-class Indian families. The men use their wedding attire for decades, before they get a new one made, usually for their children’s marriages.

The narratives that are being built around, arguably, a blunderous act of the incumbent president of the United States (POTUS), reminded me of this movie scene. Experts are trying to use an old jacket to fit the current scenario, based on their personal perceptions and linkages. Some people, harshly critical of the POTUS, have tried to fit the 1930 trade war triggered by the Smoot-Hawley Tariff Act in 1930 – that would plunge the world into a crisis. Some POTUS followers are comparing it with the 1933 & 1938 New Deal – that would help rebuilding America. Yet some others are terming this as a fresh version of the Plaza Accord (1985) – that will usher a new era of global cooperation, progress and American dominance.

In my view, 2025 is an extremely different world from 1930, 1938 or 1985. None of these old jackets may fit the current situation. History is definitely not repeating itself. It may be rhyming to the limited extent

1929-30 – Trade war, Smoot-Hawley Tariff Act in 1930

The US government chose to protect the domestic economy from the adverse impacts of economic crisis building in Europe by undertaking protectionist measures. The Smoot-Hawley Tariff Act, was passed in 1930, to raise import duties by ~20% on over 20000 items. The motive was to protect American farmers and businesses from the global competition and boost domestic manufacturing employment.

The Smoot-Hawley Act led to a significant decline in international trade as 25 countries retaliated with higher tariffs. For example, Canada imposed tariffs on 16 U.S. products, covering 30% of U.S. exports to Canada. U.S. imports fell 66% ($4.4B in 1929 to $1.5B in 1933), exports dropped 61% ($5.4B to $2.1B), and global trade declined 66% (1929–1934). U.S. GDP fell from $103.1B (1929) to $55.6B (1933); unemployment rose from 8% (1930) to 25% (1933).

The Smoot-Hawley Act was widely regarded as a policy blunder, which along with the monetary policy blunder of raising rates during a visible slow down, exacerbated deflationary pressures, leading the world into one of the worst economic depressions ever witnessed.

Another fallout of this tariff was that Senator Smoot and Congressman Hawley (authors of the Act) lost their respective seats in 1932; Republicans faced a historic Senate swing. The Reciprocal Trade Agreements Act (1934) shifted tariff authority to the president, reducing protectionism. Incidentally the incumbent POTUS has used the same authority to start the latest tariff war.

1933-1939 - New Deal, Keynesian government

After a resounding victory in 1932 elections, President Franklin D. Roosevelt offered a deal that would provide immediate relief to the people, especially unemployed and poor and stimulate economic growth through public spending and industrial/agricultural reforms. The deal comprised the five main elements-

1.    Civilian Conservation Corps (CCC) and Federal Emergency Relief Administration (FERA) provided jobs and direct aid.

2.    National Industrial Recovery Act (NIRA) and Agricultural Adjustment Act (AAA) regulated production and prices to stabilize industries and farms.

3.    Glass-Steagall Act (banking regulation), Securities Act (stock market oversight), and Social Security Act (pensions/unemployment insurance) to reform financial and capital markets.

4.    Public Works Administration (PWA) and Works Progress Administration (WPA) funded roads, dams, and schools, employing millions.

5.    Dilution of Smoot-Hawley tariffs, to empower the president to negotiate bilateral trade deals, boosting exports.

The reforms initiated under the New Deal reduced unemployment from 25% (1933) to 14% (1937), though full recovery awaited World War II. GDP grew steadily (e.g., 10.8% in 1934). Public works created lasting infrastructure (e.g., Hoover Dam). However, the increased reliance on deficit spending and regulation sparked intense debates about government overreach. Besides, some programs (e.g., NIRA) were struck down as unconstitutional, and recovery was uneven. Some critics argued that the New Deal prolonged the Depression by distorting markets.

1985 – Plaza Accord, trade corrections, sanctifying active market management

On 22nd September of 1985, the representatives from the now defunct G-5 met at Plaza Hotel, New York to discuss one of the most remarkable currency manipulation plans. On that afternoon, the US, France, Germany, UK, and Japan signed the Plaza Accord to weaken the US dollar to help the US reduce its burgeoning trade deficit.

As part of the accord, the US agreed to cut its fiscal deficit materially; while Germany and Japan consented to boost their domestic demand by cutting taxes. All parties agreed to actively “manage” their currency markets to “correct” their current account imbalances.

In backdrop to the Plaza Accord, the US Dollar had appreciated about 48% during 1980-1985, primarily induced by the sharp hikes in the policy rates by the US Federal Reserve, led by the Paul Volcker; pressurizing the US manufacturing by making (i) imports from Japan and Germany more competitive and (ii) exports to other countries less competitive. This was the time when US manufacturing giants like IBM and Caterpillar were facing severe stress and lobbying the US Congress for relief.

The US Dollar (USD) depreciated 40-50% against Japanese Yen (JPY) and German Mark (DEM) in the two years following the Plaza Accord. The plan worked with limited success but not without material collateral damage. The US-Japan trade sustained as Japanese automobile and electronic products continued to overwhelm the US consumers. US-Germany trade imbalance corrected materially. A stronger JPY, in addition to the monetary policy blunders of the Bank of Japan (BoJ), however resulted in severe deflationary conditions in the Japanese economy, resulting in the famous “lost decade”.

The Black Monday (19th October 1987) crash of the stock markets over exposed several faults lines in the Plaza Accord.

Conclusion:

Smoot-Hawley was protectionist, prioritizing domestic interests at global expense, and failed miserably pushing the global economy into a deep abyss. The New Deal blended interventionism with trade liberalization. It had limited economic success but introduced several structural anomalies, like wider and deeper regulatory overreach. The Plaza Accord sanctified active market intervention by the government and monetary authorities. It had some short-term success, but long-term impacts have been mostly negative, especially on the German and Japanese economies.

In my view, the current global landscape is fundamentally different from the 1930, 1938 and 1985. Comparing the latest tariff war to push the Make America Great Again (MAGA) campaign to any of the historical precedents would be a futile oversimplification.

…to continue tomorrow